3 Ways Companies Can Encourage Smart Risk Taking

There are two main types of risk. There's the classic "let's just go for it" risk that entrepreneurs take to build a new business (many of which fail). And then there's constant risk, where entrepreneurs make small process changes but don't bet the company on it.

Companies that haven’t embedded either form of risk into their core processes are likely dead. The world is changing too fast without constantly updating processes to stay relevant for long. Just ask Blockbuster.

Mark Zuckerberg agreed, noting, “The biggest risk is not taking any risk.” Constant experimentation and process iteration are now the onlyways to reduce risk.

Just take look at fast-growing companies like Airbnb and Uber. I call them exponential organizations and have been studying these companies, which have impact (or output) at least 10 times larger than their peers, for my new book, Exponential Organizations. Compared with their peers, these companies have distinctly different internal operations and this encompasses everything from their business philosophies to how employees interact with one another, how they measure performance (and what they value in that performance) and even their attitudes toward risk.

Intelligent risk taking is important to growing and established businesses alike. Here are three ways to make sure your business is taking risks to fuel growth without betting the farm on it:

1. Resist the urge to say no.

In describing his notion of “impedance mismatch,” Robert Goldberg, former managing director of the pioneer incubator Idealab, noted that in large organizations just 1 of 50 managers could resist an idea and in doing so, kill it. To protect its organization from risk aversion, Amazon has employed one simple rule that business leaders should consider emulating: “the institutional yes.”

If a subordinate comes to manager at Amazon with a great idea, the default answer must be yes. If the manager wants to say no, he or she is required to write a two-page thesis explaining why it’s a bad idea. In other words, Amazon has created friction for saying no, resulting in more ideas being tested (and thus implemented) throughout the company.

2. Never stop experimenting

Experimentation is particularly hard for big organizations, since they tend to focus on execution rather than innovation. To effectively marry execution with innovation, business leaders need to set experimentation processes in place. For example, to track its innovation portfolio, Amazon records exactly how many experiments any department runs, as well as its success rate.

Adobe Systems’ KickStart Innovation Workshop is another example of experimentation’s potential. Participating employees receive a red box containing a step-by-step startup guide and a prepaid credit card with $1,000 in seed money and are given 45 days to experiment with and validate innovative ideas. Not only does Adobe’s approach stimulate experimentation, but it also establishes a measurable funnel by which promising ideas and concepts can be identified and pursued in a systemic and comparable way.

3. Reward insightful experiments.

When people teach children, they say, “Keep trying.” But at some point individuals shift into a culture where risk and failure are not tolerated, especially in business. One way to reverse this is by celebrating risk in order to counteract a cultural resistance among employees to failure.

For example, the Procter & Gamble Heroic Failure award honors the employee or team with the biggest failure that delivered the greatest insight. Similarly, Tata offers an annual Dare to Try award, which recognizes managers who took the biggest risk.

This doesn't mean, of course, that just any failure or mistake is encouraged or celebrated. But if a team is operating within strategic, commercial, ethical and legal frameworks and avoids re-creating old mistakes, a failure can and should be celebrated for the learning such experimentation offers.

By integrating experimentation as a core value, business failures -- while still accepted as an inevitable part of risk -- can be quick, relatively painless and insightful. Unfortunately, within the traditional corporate environment, failure more often than not still reduces risk appetite. But companies that want to make a big impact have to take big risks -- or risk failing completely.